Remote work is becoming a norm as more and more companies choose to work with contractors who currently don’t live in the United States.
It’s important to remember that the term 1099 foreign worker only applies to US citizens who live abroad, and you’ll have to use a different form to report federal taxes if you decide to collaborate with non-US citizens.
Moreover, the form you’ll have to send to the independent contractor will depend on the payment method you’re using.
We’ll clarify all aspects of hiring talent overseas and help you understand how and when to use 1099 for foreign contractors.
Table of Contents
The Meaning of the Term 1099 Foreign Worker
The IRS defines an independent contractor as an individual that controls what will be done and when a job will be done, while the payer can only ‘control or direct the result of the work.’
Hence any US citizen or an individual eligible to pay federal taxes in the United States that doesn’t have the status of a full-time employee can be an independent contractor.
Freelancers or self-employed workers must pay self-employment tax, which is why companies cannot withhold tax from their wages, and report it to the IRS. Instead, businesses must issue different versions of Form 1099 to all contractors they hire.
In most cases, you’ll have to issue Form 1099-NEC if you decide to hire foreign contractors instead of the Form W-2 you must use to report an employee’s total taxable income and other types of compensation. Form 1099-K is used if a foreign contractor opts to receive payments through PayPal, Stripe, or some other online payment processing platform.
The Requirements for Issuing the IRS Form 1099-NEC
An independent foreign contractor must meet several criteria before you can give them the IRS Form 1099-NEC.
Most importantly, a foreign contractor must be a US citizen living overseas or a US person living abroad who can perform at least a portion of the work within the United States.
Moreover, you won’t have to issue this form if the annual of the job a foreign contractor performed for you doesn’t exceed $600.
In case you’re a freelancer living abroad and hold US citizenship, you’ll only have to collect Form 1099-NEC from clients who paid you more than $600 over the course of a year.
You’ll have to track your income on your own if you collaborate with non-US clients who cannot issue Form 1099-NEC and report it to the IRS on your tax return.
In addition, you’ll be eligible for the following tax benefits
Businesses hiring freelancers must follow the common law rules when determining if a worker qualifies as an independent contractor.
- Behavioral – A worker qualifies as an independent contractor if a company cannot control how and when the work is done.
- Financial – In case a worker provides the tools and supplies necessary to complete a job he or she is an independent contractor.
- Relationship type – Contracts that include retirement plans or paid vacations can only be given to full-time employees.
What is W-8BEN?
US-based companies that want to hire non-US foreign contractors don’t have to issue Form 1099-NEC.
In this situation you’re required to use Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting. As implied by its title, this form confirms that foreign contractors aren’t US citizens and that they’re not required to pay federal taxes. Companies only have to show these forms if they’re audited by the IRS, so you won’t have to file them in your original tax return.
Mitigating the Risks of Hiring Foreign Contractors
Before you start searching for international talent, you must take steps to protect your business from potential legal complications.
You must be familiar with laws and regulations regarding hiring foreign contractors in different countries. Hence, you must do thorough research on the local laws that may apply to your company if you find an independent contractor you’d like to work with.
Remember that contractors in some countries may lose their independent status if they cannot control the workload, timeline, or style of the work. Any attempt to control these parameters could force you into treating independent contractors as full-time employees.
Moreover, foreign governments may interpret offering professional equipment, paid time off, training programs, or benefits as an attempt to treat an independent contractor as a full-time employee.
In addition, foreign contractors might lose their independent status if they’re not paid on a per-project basis or if they continually provide services to your company.
Preparing to Hire Foreign Contractors
You’ll have to lay out the groundwork before you can start hiring foreign contractors that don’t have US citizenship. Some of the steps you’ll have to take also apply to 1099 foreign contractors who live overseas.
- Draw up a contract – You should sign a contract with an international contractor that clearly states the rights and responsibilities of both parties. Hence, the contract should state that it is the contractor’s responsibility to report income and file taxes.
- Select a payment method upfront – This is particularly important if you’re collaborating with 1099 foreign contractors who pay taxes in the United States because it enables you to know which version of Form 1099 you should issue to a contractor.
- Be Aware of Domestic and International Laws – Research the local and domestic rules and regulations that may apply in a specific situation before you sign a contract with a 1099 foreign contractor or an international contractor.
Fines and Penalties
All businesses collaborating with 1099 independent contractors must file Form 1099-NEC before January 31.
The IRS has a hard deadline for Form 1099-NEC submission because it uses it to detect fraud. Any discrepancies between the information on this form and the foreign contractor’s tax return can cause suspicion.
You’ll be subject to penalties if you miss this deadline. So, you’ll have to pay a fine of $50 per form per day if you file the required forms up to thirty days after the filing deadline. The maximum penalty you can pay in this scenario is $556,500.
The fine increases to $110 per day per form if you don’t submit the necessary documents 31 days after the deadline. You’ll have until August 1 of the current year to file all forms the IRS requires, and the maximum penalty you can pay within this timeframe is $1,669,500.
After August 1, the fee rises to $270 per day per form, with the maximum penalty being $3,339,000. In case the IRS determines you missed these deadlines intentionally, you’ll get a $550 per form per day fine with no limit on the maximum penalty.
Alternative Solutions
Instead of hiring 1099 foreign contractors directly, you can utilize the so-called Employer of Record model to attract international talent to your company.
One of the biggest advantages of this model is that you don’t have to establish a legal entity in a foreign country because you’re collaborating with a company that already has the infrastructure to hire independent contractors on a global scale.
However, this solution isn’t suitable for small businesses or companies that want to work exclusively with 1099 independent contractors.
Frequently Asked Questions
A business that works with 1099 foreign contractors doesn’t have to withhold taxes. However, you must fill out Form 1099-NEC and send copies to the IRS and the contractor.
The most recent digital version of this form features the layout editor that allows you to modify the form’s layout so that you can insert a foreign address.
You don’t have to secure a visa or a work permit for remote workers who don’t have US citizenship or a residence permit.
Form 1099-NEC is exclusively for foreign contractors with US citizenship or green card who currently live abroad. You must use Form W8-BEN if you want to work with international foreign contractors.
Speak to a CPA
Navigating the waters of hiring 1099 foreign contractors can be an arduous task if you don’t have the necessary expertise and infrastructure.
Check out Choice Tax Relief or call 866-8000-TAX to schedule a free consultation with a CPA who can assist you with hiring 1099 foreign contractors.
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Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
